The New Economy Patents In United States - Are They Really Beneficial?

Universally patents are only granted for inventions. But in the U.S. we are currently witnessing a big rush of patent applications in a rather new field, i.e. Internet business methods. Does this mean that U.S. is granting patents to business models? Interestingly in the U.S., business methods are exempted from patenting.[1] This was based on the general rule that: "laws of nature, natural phenomena, and abstract ideas" are not patentable.[2] In the Hotel Security Case[3] a method for preventing fraud and misappropriation by hotel and restaurant employees was the subject matter. The claims related to:
  • giving each waiter a number
  • choosing a head waiter to write the food taken from the pantry by each waiter
  • having each waiter write the food he or she takes on a piece of paper with a unique number and
  • having the head cashier collect the slips and verify them to the head waiter's writing.

Since this method was "as old as the art of bookkeeping", the court invalidated the patent for a lack of novelty and "invention".[4]

Universally patents are only granted for inventions.


It can be undoubtedly stated that the turning point came with the decision of the U.S. Court of Appeal for the Federal Circuit in State Street Bank v. Signature Financial Group[5], The patent in question in State Street also involved the use of a mathematical algorithm to speed up the data processing. Specifically, the patent's apparatus claims specified a data processing system where mutual funds [Spokes] pooled their assets in an investment portfolio [Hub] that was organized as a partnership.[6] The system had 2 distinct advantages the most important one being the economies of scale in administering the funds and the second one being the tax advantages of a partnership.[7] One of the important findings of the court was that the transformation of data by a machine (or apparatus) using a series of calculations resulted in the practical application of a mathematical algorithm because it produced "a useful, concrete and tangible result."[8]

To put it in another way the only question before the court was whether the invention produced a "useful, concrete and tangible result," even if the result was expressed in numbers, if the answer is in the affirmative the invention is patentable. Specifically commenting on the business method exception to patentability, the court stated that the business method exception test was ill conceived and it could not be allowed to continue.[9] What does this mean to the common man? It only means that in order to be patentable the method should be incorporated in software, it must yield a "useful, concrete and tangible result", and should be specified in "means plus function" language. Even before the said case the U.S. Patent and Trademark Office has amended the examination guidelines for Computer Related Inventions, which state "claims should not be categorized as methods of doing business. Instead such claims should be treated like any other process claims.".[10]


The State Street decision has really opened the floodgates for patenting of internet business models and many companies in the cyberspace have quietly applied for such patents.

This decision has really opened the floodgates for patenting of internet business models and many companies in the cyberspace have quietly applied for such patents. Needless to say disputes have also arisen and many are being dragged to the court, the most prominent being, Inc. v., Inc.[11] In this case the claims in question dealt with a method and system by which a consumer could complete a purchase order for an item via the Internet using a single action , the federal district judge granted Amazon a preliminary injunction protecting its patented 1-Click technology but recently the U.S. Court of Appeals for the 9th Circuit reversed that decision until a final ruling could be made in the case.[12]

At present there is a significant increase in the number of patent applications being filed, specifically in areas relating to the internet. Obviously this has increased the workload of patent office examiners and they are now unable to cope with this strange situation. This in turn reduces the efficiency and thoroughness of most prior art searches. Finally it results in a patent whose validity is a big question mark. When we peruse some of the patents being granted recently it can be seen that many are not new and non-obvious. It would certainly be hard to believe that the PTO issued a patent for crustless peanut butter and jelly sandwich.[13] Surely this shows that the PTO has lot some of its credibility and its patents are being challenged in courts on a regular basis.

Thus a bill has now been introduced in the U.S. Congress that would provide members of the public with a chance to peruse the application and enable other inventors to present prior art or public use information before business method patent is granted. If prior art (any published document or activity that was disclosed before the invention in question was made) is presented which adequately discloses the invention, the inventor will not be allowed to obtain a patent.[14] Similarly, if anybody can show that the invention in question was actually used in public, by another, before the inventor's date of invention, such "public use" will also serve as a bar to patentability.[15]


Protection of intellectual property in this new economy is really becoming very important. This can be amply gauged from the fact that large and small businesses are rushing to the Patent Office with their inventions. This is especially true after the decision in State Street.

State Street[16] is the most recent effort to demystify the proper status of business methods under the Patent Act. The Federal Circuit in holding that business methods are proper subject matter did not indicate any desire to lower the conditions for the patentability of business methods. Instead its attempt was to clarify the existing confused state of the law. The consequence is that courts will have to devote more time to analyze the scope, novelty, utility and obviousness of a claim rather than finding out whether the said claim is a product of nature or not. After the State Street the USPTO and lower courts had to examine each claim for a business method on the merits.

The invention motivation theory is perhaps the most traditional and widely endorsed view of the economic role of patent law.[17] But I personally feel that patents are not needed to encourage the invention of new Internet business methods. There are some important reasons for such an assumption, the first being the head start advantage,[18] coupled with promotional values and trade secrets. This can very well act as an incentive in this field.

Using innovative marketing and promotional campaigns which would proclaim that the firm is the real inventor of a particular business method, the head start advantage can be prolonged. To be sure trademarks can also do the trick. Trade secrets also play a dominant role here by keeping the particular method secret for an initial period of time.[19] More than that granting of patents to internet business models may exclude the implementation of many useful business methods. This can prove to be very costly.

Furthermore Internet business methods patents may be very harmful in the case of start-up firms in the internet. This is because they will not be able to compete with the established firms because of the exorbitant costs of patent prosecution and litigation. Large multinational corporations will devise new patent litigation strategies to eliminate competition from the start-ups because of their financial muscle.

In fact barrier-free entry to commerce is the hallmark of the internet and I very much fear that granting patents to internet business models may bring an end to this unique feature.

In fact barrier-free entry to commerce is the hallmark of the internet and I very much fear that granting patents to internet business models may bring an end to this unique feature. Apart from impeding new entrants from entering the marketplace, it might also throw out the existing parties from the market. This can only result in an inefficient market where there is less competition.

Business method patents can only be allowed if the gains associated with increased innovation[20] outweigh the costs associated with reduced competition in the industry in which a patent exists. Unfortunately this condition is not satisfied and that, in fact, the costs associated with competition blocking will outweigh the benefits of increased innovation. Surely granting to patents in this field has to be reviewed with an open mind.

Thus the time has arisen for us to have an introspection and take a decision on the aspects of Internet patenting. Something should be done to evolve a new system to reward inventions in this arena of Internet and serious and judicious deliberations should certainly form part of a strategy to achieve that end. There should certainly be innovation in the field of Internet business methods but this should not mean that every Tom, Dick and Harry could register a patent for methods that are trivial in nature. Undoubtedly the new bill titled Business Method Patent Improvement Act of 2001 that has been introduced in the U.S. Congress[21] is a right step towards the right direction.

  1. [1] See 35 U.S.C. § 101.
  2. [2] This was manifested in many U.S. decisions see re Wait, 73F. 2d 982 (C.C.P.A. 1934), re Schrader, 22 F. 3d 290 (Fed. Cir. 1994)
  3. [3] Hotel Security Checking Co. v. Lorraine Co., 160 F. 467 (2d Cir. 1908).
  4. [4] Kindly note that the court invalidated the patent not because the method was unpatenable but on the ground that it was not novel.
  5. [5] 149 F. 3d 1368 (Fed. Cir. 1998).
  6. [6] Ibid at 1371
  7. [7] Ibid.
  8. [8] Ibid at 1373.
  9. [9] Ibid at 1375.
  10. [10] 1996 Manual of Patent Examining Procedure, Examination Guidelines 61 Feb. Reg 7484, 7479
  11. [11] 73 F. Supp. 2d 1228 (W.D. 1999).
  12. [12] See, please note that the appeal court has not invalidated the patent.
  13. [13] U.S. Patent No. 6,004,596, issued in December of 1999, more details available at
  14. [14] See details at
  15. [15] U.S. Patent and Trademark Office, Novelty and Other Conditions for Obtaining a Patent: Excerpts From General Information Concerning Patents Print Brochure, full details at
  16. [16] Supra n.5.
  17. [17] Under this theory, the role of patent is to motivate useful invention that would not occur absent patent protection, for various theories on patent protection see Doris Este long and Anthony D'Amato International Intellectual Property Law (London: Kluwer Law, 1997) generally Ch. 1.
  18. [18] The head start advantage refers to the financial return an inventor of a business method enjoys exclusively as a result of being the first to invent.
  19. [19] More than anything, in the Internet context, this may be superior to patent protection because patents allow patent owners to exclude others' use of given business methods and thereby stifle healthy competition.
  20. [20] Under the innovation theory the purpose of patent law is not to stimulate invention, but rather to stimulate innovation and as per this theory patents encourage innovation, see Supra n.17.
  21. [21] Howard Berman and Rick Boucher have introduced this new bill in the Congress.

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